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. Last Updated: 07/27/2016

Clinton Seeks to Arrest Market Slide

The collapse in U.S. stock and bond markets has set off alarm bells at the White House, but so far the U.S. government has avoided the temptation of criticizing the Federal Reserve for the debacle.

Administration officials, from President Bill Clinton on down, have instead pinned the blame for the price rout on the markets themselves and have launched an all-out, and thus far unsuccessful, effort to convince skittish investors that they are overreacting.

"I think there was an overreaction in the markets when the Federal Reserve raised the short-term interest rates a little bit," Clinton said in Cleveland on Monday. "I don't think there's any reason to be worried about the long-term health of the economy."

With old Wall Street hand Robert Rubin in charge of coordinating economic policy, the administration is well aware that public criticism of the independent central bank could end up backfiring.

While Fed-bashing might succeed in convincing the central bank to hold down short-term rates, it could drive the economically more important long-term rates higher on heightened fears of inflation.

Since the Fed raised short-term interest rates for the first time in five years on Feb. 4, bond prices have plunged by more than 12 points, pushing the yield on the key 30-year issue to over 7.4 percent, its highest level since Clinton took office in January last year.

The collapse in bond prices has dragged the stock market down in its wake, sending the blue chip Dow Jones industrial average skidding by 10 percent in the last two months.

The stock market continued its slide Monday, plummeting more than 80 points in the morning before recovering nearly half those losses. The Dow Jones Industrial Average closed nearly 42.61 points down at 3,593.35.

Tokyo share prices, however, rebounded sharply Tuesday as traders were encouraged that Wall Street losses were not as bad as anticipated. The U.S. dollar edged lower against the Japanese yen, closing at 102.95 yen.

Although the stock market dive has grabbed most of the headlines, the administration seems more concerned about the steep rise in long-term interest rates. "I think a lot of people have thought for some time that the stock market is somewhat overvalued," Clinton said.

The administration is worried about the bond market crash because it has been counting on low long-term interest rates to power the economy while it cuts the federal government budget deficit.

"I think they're too high," Clinton said, referring to interest rates. "I think they'll come back down."

The current truce between the administration and Fed over interest rates does not mean that the two do not have their differences.

Administration officials have privately been surprised by how quickly the Fed has raised short-term rates this year -- by a total of a half percentage point. They also seem more willing than their Fed counterparts to accept a small rise in inflation in 1995 and 1996.

No one is quite sure what is pushing long-term rates higher, even the Fed. Part of it though seems to stem from signs that the U.S. economy is growing faster than had been widely expected, pushing up demand for credit and fanning fears that inflation is on the horizon.

The administration has officially forecast growth this year of 3 percent, but some officials, including Rubin, believe that the economy may expand by more than that, perhaps by 3 1/4 percent.

But it is the outlook for next year, and for 1996, that has the administration worried. If long-term rates stay high, administration officials fear that growth could be undercut just as Clinton is gearing up for another run at the presidency.

If that looks like it might happen, then the administration might come out swinging against the Fed as it fights for its political life.

(Reuters, AP)